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The issue of cryptocurrency regulation has moved from the periphery to center stage. Established financial system players appear keen for a regulatory framework while many of those who buy and sell cryptocurrencies are likely crossing their fingers that they will be unshackled by rules and regulations for as long as possible.
As part of a series of Latin America-focused articles and interviews on the matter, BNamericas spoke with US lawyer Belkenia Candelario of Miami-based firm Broad and Cassel. The interview was conducted via email.
BNamericas: There has been a lot rumblings recently in the US and Europe about regulating virtual currencies. Germany's central bank has even called for global rules. Why?
Candelario: Currently, from a global standpoint this question is broad because it can go so many ways depending on your viewpoint. Are you a general consumer, a sophisticated investor, or a regulatory authority? In the United States, where we have a bifurcated government (federal and state levels), taking a viewpoint from a particular regulator's perspective can lead you in different directions as to the motives behind policing virtual currencies. For example, should regulation come from the viewpoint of the IRS to combat tax evasion, or from the Financial Crimes Enforcement Network to combat money laundering, or even from those controlling monetary policy in the US? If you are a consumer, you desire protection against Ponzi schemes and theft, and to have some type of protection or avenue to pursue a remedy for a wrong that may occur. If you are an investor, you are probably in a conundrum – you are either looking for privacy, to cut out the middleman, or simply believe in the freedom of the market, so you do not really want government regulation, yet you desire some protection against the risks related to theft/hackings and price manipulation. If it is the OECD, a part of the rationale for coming up with a regulatory framework for the virtual currency market is to combat money laundering and terrorist financing. So maybe there are more genuine concerns for regulating the virtual currency scene than not?
BNamericas: Can you give us a quick overview of the state of play in terms of virtual currency regulations, or lack thereof, in the major economies of Latin America: Argentina, Brazil, Chile, Colombia, Mexico and Peru?
Candelario: For several years, Latin America has been seen as taking a conservative view when compared to the rest of the world regarding the use of virtual currency. I don't believe this will be the case any longer. In Argentina, virtual currencies are not legal tender under the country's national constitution, instead they are considered property. Argentina recently implemented a 15% tax rate for its tax residents on income from dispositions of digital currencies.
On February 19, 2014 and November 16, 2017, the central bank of Brazil issued notices regarding the risks of trading virtual currencies because of the inherent instability of such systems, and stated that virtual currencies are not electronic money, currently alluding to a proceed at your own risk approach for its users. Nevertheless, in the notice, the central bank of Brazil seems to embrace the growth and use of virtual currencies as it voiced a commitment to support financial innovations, including those based on new technologies that make the financial system more secure and efficient. The Brazilian revenue office stated that virtual currencies are to be compared to financial assets for income tax purposes and gains are subject to 15% capital gains tax for amounts above a certain threshold.
In Chile, there is no regulation on the use of virtual currency. According to an article published by the Chilean library of congress on March 1, 2018, an expert in computer/cyber security noted that in the short term, any regulatory framework will be hard to promulgate because in Chile there are few computer/cyber security laws in place.
Colombia's financial regulatory body currently impedes the virtual currency market's penetration into its financial system, but not other sectors of the economy. As in Brazil, the Colombian government has announced a proceed at your own risk approach for private transactions.
Mexico's government has proclaimed that virtual currency is not legal tender; however, just a few weeks ago it enacted a regulatory framework that will introduce the virtual currency market to Mexico's financial institutions. The regulatory framework is intended to regulate platforms called Financial Technology Institutions or "ITFs," which deal with virtual currencies. Operators in the business of dealing with virtual currency will have to be approved by the Bank of Mexico [central bank] as an ITF. Consequently, financial institutions will be able to enter into transactions involving virtual assets like virtual currencies, and will be allowed to invest in such ITFs.
BNamericas: We realize it is a complex matter but how, in layman's terms, do you actually regulate a virtual currency and what challenges could this present for governments in Latin America in terms of technical know-how, etc?
Candelario: Generally, foreign governments are aware that the challenge to regulating certain markets lies in the fact that technology evolves much quicker than government regulation, and that because of globalization – which continues to promote and progress technological advances – the world now requires some sort of global cooperation among autonomous governments to address issues arising from the use of such advances. As was noted in the Chilean library of congress article I mentioned above, a lack of computer technology laws makes it more difficult for Latin American governments to regulate the virtual currency markets because they cannot "borrow" from such laws and make the necessary tweaks that would allow them to keep up with the times to address the newer technological aspects of the global market.
The rational place to start promulgating laws would be the financial/banking sector. A regulatory framework could start [by] clarifying whether an individual or company is engaging in a virtual currency business activity, and whether that person would be exempt from such law or must register with or obtain a license from some government agency. In other words, such laws could begin addressing (1) licensing requirements for platforms and businesses dealing with virtual currency; (2) the supervision of licensees; (3) the benefits of reciprocity with other foreign governments; (4) consumer protection laws; and (5) cybersecurity laws.
BNamericas: Do you think we'll see more countries in Latin America going down the regulatory avenue? Why?
Candelario: Yes. According to the National Conference of Commissioners on Uniform State Laws, which on October 9, 2017 published proposed regulations for uniform adoption by US states, "[c]larity about which regulatory regime will govern virtual currency business activity will assist virtual currency businesses in many states and the greater legitimacy that uniform acts can bring to industry sectors will enhance the ability of these types of businesses to attract investment and customers." In a world fueled by trading and bargaining, and the importance given to the gross domestic product of a particular country, I agree with embracing the virtual currency market and bringing more legitimacy to the industry through government regulation to further stimulate the economy and perhaps bring stability to volatile governments/financial industries.
BNamericas: What about tax? It appears that most people who make money from cryptocurrencies don't pay taxes on their profits. Do you see this becoming a growing issue and could regulations solve this?
Candelario: I don't believe that a regulatory regime addressing the taxation of virtual currency transactions will be more difficult to promulgate once there are laws in place addressing the areas I previously mentioned. If a government simply treats virtual currency as any other appreciable asset, it could borrow from existing regulations and implement existing principles that could be adapted to the virtual currency industry.
BNamericas: Some banks – such as Lloyd's in the UK – have implemented borrowing restrictions for people who want to buy cryptocurrency, citing risks about plunging values. As banks have been against the concept of cryptocurrency, could this actually be more of an anti-cryptocurrency strategy? Could we see banks in Latin America follow suite?
Candelario: It probably is an anti-cryptocurrency strategy considering that one of the principal advantages heavily promoted by virtual currency proponents is that it theoretically cuts costs because of the fact that it cuts out the middle man a.k.a. financial institutions. They can resist, but the fact is that, presently, the virtual currency market is exploding and has not slowed down since the craze over bitcoins and its pseudonymous creator(s) who put virtual currency and blockchain technology on the map on a global scale in 2013. Once virtual currency regulation starts flowing and there is a certain level of global conformity as to the regulatory regime for the financial markets, financial institutions will certainty endeavor to be dominant players in such a market, and will categorically not miss out on cashing in on the investment opportunities that the virtual currency market will inevitably bring.
BNamericas: And finally, do you think cryptocurrencies like bitcoin will eventually become part of the established global financial system or always remain on the periphery?
My response above supports my belief that virtual currencies will inevitably become a part of the global financial system. For example, Mexico has legitimized the use of virtual currencies in its financial markets, which will bring confidence to investors and consumers in connection with the risks associated with transactions dealing with virtual currency.
About Belkenia Candelario
Belkenia Candelario is an associate at Miami law firm Broad and Cassel LLP in the Taxation Group. Belkenia focuses her practice on domestic and international tax planning, and advises high net worth individuals and families as well as business entities from around the world on a diverse range of tax matters. She graduated from the University of Miami School of Law with a Juris Doctor, cum laude, and a Master of Laws in Taxation.